FYI | May 16 2007
By Greg Peel
This occasional report has noted previously that Wall Street traders aren’t quite sure wether they are Arthur or Martha at the moment. Last night featured more of the same.
Just when traders thought inflation had been tamed, and a rate cut might be around the corner, the Fed last week dashed those hopes by leaving rates unchanged and noting that inflation remained the elephant in the room. This led to the wobblies, and the Dow finally broke its long upward run into blue sky. However, it didn’t take too long for the bulls to reassert themselves.
Last night the April CPI came out at a rise of 0.2%, implying a year on year inflation rate of 2.3% – a one-year low. Immediately the market decided inflation fears had been put to bed once more, so let’s party. The Dow rose 134 points into new territory. But it wasn’t to last.
For starters, expectations had been for only a 0.1% CPI rise, so this wasn’t necessarily brilliant news. Moreover, news on the oil front was rather grim. While crude oil might be 9% lower than this time last year, the gasoline price has just hit an average US$3.08/gallon, and that is a record price. And the US summer “driving season” is just about to start. Perhaps the Fed was right.
Then the US National Association of Home Builders chimed in, and declared that the troubled housing sector looked unlikely to recover before next year. This was followed by some poor quarterly profit results from Home Depot and Wal-Mart. Could it be that a Dow in record territory is just a bit overdone?
The index fell almost 100 points to finish up only 37 on the day. Continuing trouble in the technology sector saw the Nasdaq close down 21 points while the broad market S&P 500 slipped slightly.
The gold market, too, was somewhat confused by the data last night. If inflation is low then gold is a hedge against inflation and perhaps should fall, except that a cut in rates would lower the US dollar which is bullish for gold. It’s the age old dilemma. Suffice to say gold fell initially to around the US$664 mark before rallying to close up on the day at US$671.40.
Most of the base metals were quiet last night, with the exception of nickel, which decided after yesterday’s fall that a rally of nearly 4.5% was in order on the New York market.
The much-hyped uranium futures market has proven to be slow out of the blocks. Last night was the second in a row without a trade, leaving the settlement price at US$138/lb against the last recorded physical trade of US$120/lb which is now over one week old.
The local bourse may also be undecided this morning. The SPI Overnight was up 14 points. Macquarie Bank (MBL) has to come out of a trading halt after its record profit announcement and builder/aluminium/sugar producer CSR (CSR) will announce its interim profit. Will it also announce a break-up of the business? Or is that a strategy still only under consideration, if at all?